A dissolution agreement details the terms and conditions by which business owners dissolve an existing business entity. Not all business relationships work out. A Dissolution Agreement offers the clarity of determining how the assets and liabilities of the former entity will be split between the members and can prevent both misunderstandings and later litigation or disputes. Dissolution Agreements are particularly important in partnerships, because in their absence there may be no clear end to the partnership and partnership liability may continue indefinitely.
It is important to document when a partner or co-owner leaves a business or when a business must be closed or shut down entirely. Even if there is no compensation offered, you will need to document the withdrawal of a partner or an owner of your company; otherwise there will be no record of the partner or owner actually leaving the business and you can be exposed to claims that it never happened, which as outlined below, can only have negative consequences. It is important here to remember that withdrawing from an ownership position is different than withdrawing as an officer, manager, or employee of the business. Furthermore, withdrawal as an officer, manager, employee, or from any other position within the business is not sufficient to withdraw from an ownership position.
As much as you want to document any compensation paid to the person(s) withdrawing, all parties will want to make sure liability is cut off. If you are the member/shareholder/partner withdrawing, you want to make certain that you are not responsible for any liabilities of the business from the withdrawal date forward. If you are continuing the business, you will want to make sure to remove the withdrawing owner/partner from all accounts, any officer positions, or other official positions within the business, as well as terminate their ability to make decisions or take any action on behalf of the business from the withdrawal date forward. Withdrawing owners/partners should also be compelled to return any company property in their possession.
In a dissolution of a business, you will want to appoint someone to take care of any outstanding liabilities, distribute any remaining assets to the owners, and ultimately take care of dissolving the company, if you have a company. Specific assets may be allocated to specific parties by agreement; if you dissolved without an agreement, the person in charge of winding up the affairs would simply sell or liquidate everything and distribute the proceeds to the owners according to percentages of ownership after paying creditors. Be sure to consider intellectual property here, as there may be some residual value of the company that you should distribute and would otherwise not be easy to sell without an agreement. Perhaps one owner pays some amount to the other owner(s) so that he/she can keep the intellectual property and/or other assets owned by the business for his/her future use. All of these details can be documented in a dissolution agreement, which is particularly critical when dissolving a partnership, for in the absence of such an agreement, there may be no clear evidence of an end to the partnership, which could potentially allow for partnership liability to continue in spite of the partners’ intentions to dissolve.
• Any settlement agreement should document the initial facts of ownership, i.e. when the withdrawing owner became an owner, their percentage equity, and any positions held, so that you can be very clear as to exactly what positions and what ownership is being sold, withdrawn, or released, and what the new ownership picture will look like.
• General release language is imperative, so each party waives its ability to sue the other for any issue relating to the business, ownership of the business, or any other problem that may exist (whether then-known or not) between the parties.
• You may want to include non-disparagement and confidentiality clauses so that neither party can say negative things about the other in the future or discuss the terms of the settlement with anyone else.
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